BUSTO ARSIZIO, Italy, Feb 12 Italian police
arrested the head of defence group Finmeccanica SpA on
Tuesday on a warrant alleging that he paid bribes to win an
Indian contract, adding to a wave of corporate scandals shaking
Italy before a general election.

Prosecutors accused Chief Executive and Chairman Giuseppe
Orsi in the arrest warrant of paying bribes to intermediaries to
secure the sale of 12 helicopters in a 560 million euro ($749
million) deal when he was head of the group's AgustaWestland
unit.

"AgustaWestland and its management seem to be used to paying
bribes and we have reason to believe that such a corporate
philosophy could be repeated in the future if not stopped
through an arrest," Judge Luca Labianca wrote in the warrant,
reviewed by Reuters.

Orsi's lawyer said his client denied distributing any money
or pocketing a single euro.

Highlighting the political sensitivity of the case before
the parliamentary elections on Feb. 24 and 25, Prime Minister
Mario Monti said the government would deal with management
issues at Finmeccanica. The state is the largest individual
shareholder in the company with more than 30 percent.

"There is a problem with the governance of Finmeccanica at
the moment and we will face up to it," Monti told RAI state
television.

In a statement, Italy's economy ministry said it was working
to provide management continuity, the protection of
shareholders' interests and transparency in decision-making at
the group.

Finmeccanica convened a meeting of its board for Wednesday
at 1700 GMT to consider the next steps. In a statement, it said
activities would continue as usual "in order to limit the impact
from today's judicial activities on, amongst other things, the
disposals process under way."

The heavily indebted group is seeking to sell its
AnsaldoEnergia power engineering business to focus on its core
aerospace and defence activities and avoid a costly credit
rating downgrade.

India, currently the world's largest weapons importer, has a
history of corruption in defence deals dating back to the 1980s.

Indian Defence Minister A.K. Antony has ordered an inquiry
into the deal to be conducted by the Central Bureau of
Investigation, the country's federal police force. In a
statement the ministry said Italy had not provided details of
its own investigation.

An Indian defence ministry source said allegations that
kickbacks worth 40 million rupees had been paid to Indian
officials to grease contracts for Finmeccanica were being
investigated and that Delhi was considering the deferral of the
Finmeccanica helicopter deal.

Police searched Orsi's home and the offices of
AgustaWestland, close to Milan. The Milan offices of
Finmeccanica, Italy's second-biggest corporate employer after
Fiat Spa, were also searched.

POLITICAL SHADOWS

A series of scandals has shaken Italian business in recent
weeks, notably over derivatives losses at lender Banca Monte dei
Paschi and an inquiry into allegations that oil
services group Saipem SpA, which is 43 percent owned
by oil major Eni SpA, paid bribes to win contracts in
Algeria.

Orsi, a long-serving defence industry executive, has always
denied any wrongdoing with regard to a corruption inquiry into
AgustaWestland which first came to light in February 2011.

His lawyer Ennio Amodio told reporters on Tuesday that Orsi
was stunned by the arrest. "He cannot figure out what he can be
accused of. He did not pocket a single euro and did not
distribute any money," Amodio said.

The corporate scandals have become an issue in Italy's
parliamentary election campaign. Orsi's appointment to lead the
heavily indebted defence group in May 2011 was backed by the
Northern League party, an ally of then Prime Minister Silvio
Berlusconi.

Lawyer Amodio said the warrant made no mention of any
alleged payments to the Northern League.

Centre-left politicians had called for Orsi to step down
when he was first targeted in the corruption investigation.

"Some of the parties clearly have an interest in playing the
justice card for political capital in view of the vote," said
Stefano Zamagni, professor of economics at Bologna University.

Besides Orsi, three other people have been placed under
house arrest, including AgustaWestland chief Bruno Spagnolini.

In the arrest warrant, prosecutors allege that Orsi and
others paid money through intermediaries, including Indian
nationals and U.S.-born Guido Ralph Haschke, who also has
Italian nationality.

They alleged that those middlemen paid a former Indian Air
Force chief to change the terms of the tender to allow
AgustaWestland to win the contract. The warrant does not make
clear how much money was supposedly paid.

RESTRUCTURING PLAN

Finmeccanica shares were down 7 percent on Tuesday, while
its rail technology unit Ansaldo STS was down 3
percent.

Concern has been growing that the corruption investigations
could tarnish Finmeccanica's reputation and distract management
while the company is carrying out a tough restructuring.

Being excluded from the growing Indian market could be a
major problem for the group, which faces defence budget cuts in
its main Italian, British and U.S. markets.

Under Indian defence procurement rules, companies found to
have been involved in corruption can be punished with
blacklisting and fines, an Indian defence ministry source said.

Orsi's arrest also risks derailing Finmeccanica's plans to
sell its non-core energy and transportation assets, something
the company wants to do to avoid further downgrades of its
credit ratings.

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